Growth Vs IDCW Fund

What is the growth option?

In growth option, the mutual fund scheme reinvests the profits back into the fundwith an aim towards capital appreciation. The investments in the growth option may give good returns over time to the investors.

The key characteristics of growth option includes:In the next section we will look at the different types of mutual fund returns.

1. Reinvestment of profits: In the growth option, invests the profits are re-invested back into the scheme, thereby enjoying the benefits of compounding returns over time.
2. Long-term capital appreciation: Growth option is ideal for investors with a long-term investment horizon of 5-10 years. The effect of compounding returns has the potential to grow into a large corpus over time.
3. NAV: Since the profits are reinvested into the fund itself, the Net Asset Value (NAV) of growth option is always higher.

 

What is the IDCW option?

IDCW or income distribution cum withdrawal option, earlier known as dividend plans, may distribute profits as dividends to mutual fund investors. The dividends could be paid out as profits made by stocks or by selling some of the underlying stocks.

The characteristics of an IDCW option are:

1. Regular Income: IDCW option may give periodic pay-outs to investors, making them suitable for those seeking regular income. It should be noted that in mutual funds schemes, dividends can be distributed when the fund has booked profits on the sale of securities. A scheme can declare dividends only from the gains it has made either through sale of securities or by way of interest or dividend income.
2. Capital Appreciation: Capital appreciation in IDCW option is lower than corresponding Growth option since the NAV in IDCW option decreases by the amount of the dividend distributed each time.
3. Tax implications: Income from dividends paid out by an IDCW fund is taxable as per the investor’s income tax slab rate, impacting the overall returns from the fund.

Which one should you choose between direct growth vs IDCW fund?

When we speak of direct growth option of a mutual fund scheme, we are actually referring to the option which does not involve the services of a mutual fund distributor, while buying the fund. These funds have a lower expense ratio than the regular growth option.

The following factors can determine an investor’s choice between direct growth vs IDCW options.

• Investment Objective:

  Growth option is suitable for investors aiming for long-term wealth creation as they can reap the benefits of compounding. In an IDCW fund, the compounding effect cannot be enjoyed as profits may be distributed to the investors at the discretion of the AMC. Invest in the IDCW only if you are looking for periodic income. However, remember that there is no guaranteed income by way of dividend payment in mutual funds.

• Tax implication:

  Upon redemption, the returns from growth option are subject to long-term capital gains (LTCG) tax or short-term capital gains tax (STCG) as applicable. In an equity fund, if the investment is held for more than one year then investors have to pay LTCG, while STCG applies for holdings less than a year.

  In IDCW funds on the other hand, income from dividend is taxed as per the investor’s income tax slab rate.

Conclusion

Choosing between growth and IDCW funds depends on individual financial goals and needs. Investors looking for long term capital appreciation should consider the growth fund whereas if you are looking for periodic income from your investments then you can opt for the IDCW fund. Investors should also consider the tax implications and their risk tolerance before making a decision.

Source: AMFI Knowledge Centre, Union Budget 2023-24

Consult your financial planner or mutual fund distributor to understand which option will be best suited to your individual needs.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.